Does Goldman Sachs Need New Leadership?

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With its reputation battered by public allegations that it misled a client with regard to a complex derivatives deal that resulted in massive losses, the bank's top executive decides to retire early and is ultimately replaced by a former high-ranking Treasury Department official. That was Bankers Trust in 1995. Is it a model for the way forward at Goldman Sachs (NYSE: GS  ) in 2010?

Buffett's a fan
Not if you ask Warren Buffett, who offered unqualified support for Goldman CEO Lloyd Blankfein at Berkshire Hathaway's (NYSE: BRK-A  ) (BRK-B) Annual Meeting in May. Asked to name a hypothetical replacement for Blankfein, Buffett replied: "If Lloyd had a twin brother, I would vote for him. I have never given that a thought." (Berkshire owns $5 billion of Goldman preferred shares, along with warrants to purchase common shares.)

Goldman: Inside and outside
This week, however, outspoken banking industry analyst Dick Bove called for management changes at Goldman and said that CEO Lloyd Blankfein "probably has to go, not because he doesn't know how to run Goldman Sachs, but because of the fact he has difficulty handling the world outside Goldman Sachs."

I think Bove hits the nail on the head here. Blankfein is very probably an excellent manager; Goldman was better prepared than its peers going into the crisis, and financially, it has capitalized to the full extent (excessively, some would argue) on the upheaval in the industry since then.

Capital: Financial and reputational
However, the firm hasn't displayed the same agility with respect to managing its reputational capital: Management has been glacially slow in recognizing and adapting to the changes in the political and regulatory climate. The firm continues to commit faux-pas in this realm -- this week, a government commission investigating the financial crisis accused it of stalling with regard to requests for data, before submitting roughly 2.5 billion pages worth of information (the classic "avalanche" tactic used in the legal discovery process).

Leadership: Manager or statesman
At this key junction in the history of the investment banking industry, Goldman Sachs needs more than an effective manager at its helm, it needs a statesman -- someone with the skills and vision to smooth the transition to the new financial order. So far, Blankfein hasn't built a convincing case that he fits that profile. Although they may lack his trader's instincts, both Jamie Dimon of JPMorgan Chase (NYSE: JPM  ) and James Gorman, the new CEO of Morgan Stanley (NYSE: MS  ) look more polished as diplomats (admittedly, neither one has faced the same degree of external pressure as Blankfein).

Does Goldman need a new CEO? Ultimately, that is a matter for Goldman's shareholders and its board of directors to decide. If you've got an opinion on the matter, let us know in the comments section below.

Whether it's large-cap or small-cap, investors should expect disappointing returns from U.S. stocks over the next several years. The good news is that there are alternatives for your money. Tim Hanson explains how to make more in 2010.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (8)

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  • Report this Comment On June 09, 2010, at 5:13 PM, joroi wrote:

    "new financial order"? What is really new other than the alledged pupulist outcry the media continues to spin daily?

    Yeah, I guess we need more 'statesmen' ... we really don't have enough 'talkers' these days. Blankfein did enough knee-bending at all these public shows Congress and the White House put for them. Let's just face it, we are in the era of dirty Chicago-style backoffice brawl here that aims to assert politician's control over the money. Just one more stop towards socialism and the 'dictatorship of the proletariat.'

  • Report this Comment On June 09, 2010, at 5:24 PM, joroi wrote:

    Can comments be posted here ...

  • Report this Comment On June 09, 2010, at 6:50 PM, plange01 wrote:

    goldman is finished no matter who runs it

  • Report this Comment On June 10, 2010, at 12:07 AM, TMFDiogenes wrote:

    Alex, this is the best case I've heard so far for GS needing new leadership.

  • Report this Comment On June 11, 2010, at 3:08 AM, Tastylunch wrote:

    Naw I think he just needs to stop speaking publicly.

    Hire an Erin Callan type, well maybe not her, but someone in that role. Let them be the "face" of Goldman Sachs.

    Of course if congress does end up forbidding them from trading (or making them spin the activity off) than they might actually need a new CEO. Blankfein's strength is trading....

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